Not all spending counted by inflation rate

The Government’s headline inflation rate only includes 70% of goods and services in the average shopping basket, according to figures released by Alliance Trust Research Centre.

In its ongoing study of inflation, the Research Centre has already found that the relevance of headline CPI varies greatly depending on consumers’ ages. Now, applying the same model it has developed to study spending by age group, Alliance Trust says the amount of spending captured in the CPI changes for different age groups. For 30-49 year olds, only 66% of spending is included, compared to 79% for under-30s and 73% for over 75s.

Shona Dobbie, Head of Alliance Trust Research Centre, said, “Consumers need to take account of the fact that the official inflation rate applies only to part of their spending every month. Since people of different ages allocate varying proportions of their spending to different categories of goods the percentage of their spending that is captured by CPI can vary considerably. This means that CPI is, at best, a partial and over-generalised indicator of the changing pressures on your personal spending.”

For instance, council taxes and rates, which are not included in CPI, rose by an average 134% between 1993 and 2007, meaning that the average payment has jumped from less than £570 to more than £1320 in that period. This compares with a 46% jump in the previous headline inflation measure, the RPI, over the same period and an increase in earnings of less than 90%. The government adopted CPI as its primary measure of inflation after December 2003, even though RPI included more housing costs.

Spending captured by the CPI shopping basket of 650 representative consumer goods and services does not include mortgage interest payments and council tax, life assurance, contributions to pension funds, and payments associated with the purchase or alteration of dwellings. This spending is largely ‘financial’ in nature and is not associated with regular price movements such as those picked up by the CPI basket.

Shona Dobbie said, “People reviewing their finances should be aware that the official inflation rate may not reflect the rate at which their own costs are changing; indeed, depending on what you buy, your personal inflation rate could be well above average. Also, for a more accurate measure of consumer financial wellbeing, you should take into account all the factors affecting households - from budget, including inflation, to the economic backdrop and pressures on assets and wealth. Our new measure, Alliance Trust’s quarterly Financial Reality Index, includes all of these.”